5 Ways to Invest in Private Companies

Investors don’t have to wait until a company lists on a stock exchange to buy shares in it. It is also possible to invest in private stock.

The rewards can be huge because investors are typically buying into companies at an early stage of their development. They are growing at an often rapid pace, developing a brand and reputation and appetite from the investing public.

As such when they IPO there can be a huge swell of demand for those much-sought after shares. Early holders can earn themselves a windfall.

But there are also limitations in who can invest in private companies. It is often only available to institutional or so-called accredited investors. The latter tend to be high-net-worth individuals who use their wealth to invest directly in private companies or through private funds.

Retail investors can also access private stock, however, such as through crowdfunding platforms.

There are risks to be considered such as financial transparency and illiquidity. Unlike publicly traded stock where you can sell your shares quickly, it may take you longer to do so when the company is still private. There are no guarantees that you can cash-out easily. There is also no easily observable market price created by a number of buyers or sellers so valuation can be trickier.

How to Invest in Private Companies

• Secondary Marketplaces: Examples include – Forge Global, Hiive, and EquityZen. These marketplaces connect accredited investors with existing private company shareholders, such as employees, angel investors or venture capitalists looking to sell their shares before an IPO. As per the ForgeGlobal website accredited investors should possess earned income over $200,000 over the last two years or possess a net worth of $1 million. It adds that investors can ‘Explore live opportunities in leading private companies, use pricing insights and trends to evaluate investments and submit bids, negotiate terms and complete trades.’ It says it helps streamline the process for buyers and sellers. It provides insights in over 4,700 companies including OpenAI and Databricks.

• Venture Capital and Private Equity Funds – These are funds which pool money from investors into typically early stage companies. They focus on companies that have high long-term growth potential and are in need of capital to fuel their growth and development. Venture funds will often look to invest in a particular industry sector, business type, or geographic region where there is substantial growth potential. Venture funds typically aim to exit their investments through an initial public offering (IPO) or through an acquisition by a larger public or private company. According to private equity digital platform Moonfare, venture capital funds have traditionally been difficult for individual investors to access, catering instead to institutional investors by imposing high minimum investments. Retail investors can get exposure to venture capital funds via digital investing platforms such as SoFi.
• Angel Investing –  An angel investor is someone who invests their own money in a small business in exchange for a minority stake usually between 10% and 25%. They tend to be entrepreneurs or people with extensive experience in the business world.
• Invest in Publicly Traded Asset Management Firms – By buying shares in PE firms such as KKR (KKR) and Blackstone (BX) you can indirectly invest in private firms from a whole range of sectors.
• Crowdfunding Platforms – Often very early stage firms seek investment via platforms such as Wefunder. Investors can put cash into a business in exchange for equity.